QuickBooks Online Accounts Receivable Best Practices for Construction Companies

Efficiently managing accounts receivable (AR) is vital for the financial health of any construction company. In an industry where projects often extend over long periods, maintaining consistent cash flow is crucial but challenging. Issues like payment delays, invoice disputes, and complex billing for multi-phase projects can severely impact your cash flow.

QuickBooks Online (QBO) offers powerful tools to streamline AR processes, helping you manage invoicing, track payments, and optimize cash flow. To maximize these tools, it's essential to implement best practices that cater to the specific needs of construction companies, such as progress invoicing and automated reminders.

This guide outlines key AR best practices tailored for construction companies and explains how to implement them in QBO to improve cash flow, reduce unpaid invoices, and ensure your business's financial stability.

1. Implement Progress Invoicing

What is Progress Invoicing

Progress invoicing allows you to bill clients incrementally for portions of the total contract amount as specific milestones or phases of the project are completed. Instead of waiting until the entire project is finished, you can invoice based on the percentage of work completed.

Benefits

• Maintain a steady cash flow throughout the project to cover ongoing expenses like labor and materials.
• Reduce financial risk associated with large, end-of-project invoices that may be delayed or disputed.
• Improve client relationships by providing transparency and regular updates on project progress.

How to use in QBO

• Create an Estimate: Navigate to "New" → "Estimate" under the Customers section, and fill out the project details.
• Release Invoices from Estimate: Convert portions of the estimate into invoices as milestones are achieved.
• Set up Progress Invoicing: Enable this feature under "Sales" → "Progress Invoicing" in QBO settings.

2. Manage AR Retention

What is AR Retention

AR retention is a process where a percentage of the total contract amount is held back until project completion, ensuring that the contractor fulfills all obligations before the final payment is made.

Benefits

• Provides security for both parties, ensuring the work meets agreed-upon standards before full payment is released.
• Reduces the risk of incomplete work or disputes.
• Proper retention management helps avoid cash flow problems and prevents distortion in financial reports.

How to use in QBO

• Set Up Retention Items: Go to "Products and Services" under "Sales" and create service items representing retention percentages.
• Apply Retention on Invoices: Subtract the retention amount from the invoice total using the retention item, keeping it separate as a liability.
• Release Retention: Once the project is completed, adjust or create a final invoice to release the retained funds.

Check out our more detail blog Master Retention in QuickBooks Online - A Contractor’s Guide

3. Set Clear Payment Terms

What are Payment Terms

Payment terms define when clients are required to pay for services rendered, including discounts for early payments and penalties for late payments.

Benefits

• Reduces the likelihood of disputes over payment deadlines.
• Provides legal protection in cases of non-payment.
• Offering early payment discounts encourages faster payments, while late penalties deter delays.

How to use in QBO

• Define Payment Terms: Create custom payment terms under "Sales" settings.
• Apply Terms to Invoices: Select appropriate payment terms when creating invoices.
• Communicate Terms: Clearly display payment terms on invoices and contracts to avoid misunderstandings.

4. Offer Multiple Payment Options

What are Multiple Payment Options

Providing various payment methods—such as credit cards, bank transfers, and digital wallets—makes it easier for clients to pay invoices.

Benefits

• Increases the likelihood of on-time payments by accommodating client preferences.
• Enhances client satisfaction and speeds up the receipt of funds, improving cash flow.

How to use in QBO

• Enable Payment Methods: Go to "Settings" → "Payments" and connect to payment processors like QuickBooks Payments.
• Add Payment Links: Include payment links in invoices for easier payment.
• Monitor Payment Methods: Track the most popular methods among clients and adjust offerings accordingly.

5. Monitor AR Aging Reports Regularly

What is an AR Aging Report

An AR Aging Report categorizes unpaid invoices based on how long they have been outstanding, typically breaking them down into 0-30, 31-60, 61-90, and over 90 days.

Benefits

• Helps prioritize collections by identifying overdue accounts.
• Reduces the risk of bad debt, improves cash flow, and maintains healthy client relationships.
• Provides insight into clients who may need more flexible payment terms.

How to use in QBO

• Access AR Aging Reports: Navigate to "Reports" → "Accounts Receivable Aging Summary" or "Detail."
• Customize Reports: Filter by date range, customer, or aging period.
• Schedule Automatic Reports: Set up scheduled email delivery of AR Aging Reports to team members.

6. Utilize Automated Reminder Features

What are Automated Reminders

Automated reminders notify clients when invoices are due or overdue. These can be scheduled before, on, or after the due date.

Benefits

• Reduces administrative workload by automating the tracking and sending of payment reminders.
• Increases the likelihood of on-time payments by keeping invoices top of mind for clients.
• Minimizes the need for follow-up collections, improving cash flow.

How to use in QBO

• Set Up Reminders: Configure reminder schedules under "Settings" → "Automation."
• Customize Reminder Emails: Include branding, specific messages, and payment instructions.
• Monitor Effectiveness: Track how reminders impact payment behavior and adjust accordingly.

Frequently Asked Questions About QuickBooks Online Accounts Receivable for Construction Companies

Why is accounts receivable management particularly challenging for construction companies?

Construction companies face unique AR challenges because projects often extend over long periods, making consistent cash flow difficult to maintain. Common issues include payment delays from complex approval processes, invoice disputes over project scope or quality, multi-phase projects requiring specialized billing approaches, retention amounts that delay full payment until project completion, and cash flow gaps between project phases. Unlike other industries with routine transactions, construction AR involves large amounts, irregular payment schedules, change orders, and multiple stakeholders. Effective AR management is crucial for covering ongoing expenses like labor and materials while waiting for payments, making specialized tools and practices essential for financial stability.

How does progress invoicing work in QuickBooks Online and why is it beneficial for construction companies?

Progress invoicing allows construction companies to bill clients incrementally for portions of the total contract amount as specific milestones or phases are completed, rather than waiting until the entire project is finished. In QuickBooks Online, you create an estimate with project details, then convert portions of the estimate into invoices as milestones are achieved by enabling progress invoicing under Sales settings. Benefits include maintaining steady cash flow throughout the project to cover ongoing expenses, reducing financial risk from large end-of-project invoices that may be delayed or disputed, improving client relationships through transparency and regular project updates, and ensuring better cash flow management for long-term projects.

What is AR retention and how should construction companies manage it in QuickBooks Online?

AR retention is a process where a percentage (typically 5-10%) of the total contract amount is held back until project completion, ensuring contractors fulfill all obligations before final payment. In QuickBooks Online, manage retention by setting up retention items under Products and Services representing retention percentages, applying retention on invoices by subtracting the retention amount using the retention item, keeping it separate as a liability, and releasing retention once the project is completed by adjusting or creating a final invoice. Proper retention management provides security for both parties, reduces risk of incomplete work or disputes, helps avoid cash flow problems, and prevents distortion in financial reports.

What payment terms should construction companies establish and how can they be implemented in QuickBooks Online?

Construction companies should establish clear payment terms that define when clients must pay, including net payment periods (typically 15-30 days), early payment discounts to encourage faster payments, late payment penalties to deter delays, and specific retention release conditions. In QuickBooks Online, define custom payment terms under Sales settings, apply appropriate terms when creating invoices, and clearly display payment terms on invoices and contracts. Benefits include reducing likelihood of payment disputes, providing legal protection in non-payment cases, encouraging faster payments through early discounts, and deterring delays through late penalties. Clear terms help maintain professional relationships while protecting cash flow.

How can construction companies use AR aging reports effectively in QuickBooks Online?

AR aging reports categorize unpaid invoices based on how long they've been outstanding, typically breaking them into 0-30, 31-60, 61-90, and over 90 days categories. In QuickBooks Online, access these reports under Reports > Accounts Receivable Aging Summary or Detail, customize by filtering date ranges, customers, or aging periods, and schedule automatic email delivery to team members. Effective use involves regularly reviewing reports to prioritize collections by identifying overdue accounts, reducing bad debt risk, improving cash flow management, maintaining healthy client relationships, and providing insight into clients who may need more flexible payment terms. Regular monitoring helps prevent small issues from becoming major collection problems.

What automated reminder features are available in QuickBooks Online for construction companies?

QuickBooks Online offers automated reminder features that notify clients when invoices are due or overdue, which can be scheduled before, on, or after due dates. Set up reminders by configuring reminder schedules under Settings > Automation, customize reminder emails to include branding, specific messages, and payment instructions, and monitor effectiveness by tracking how reminders impact payment behavior. Benefits include reducing administrative workload by automating payment tracking, increasing likelihood of on-time payments by keeping invoices top of mind, minimizing need for manual follow-up collections, and improving overall cash flow. Automated reminders are particularly valuable for construction companies managing multiple clients and project phases simultaneously.

How can construction companies optimize payment options to improve accounts receivable?

Construction companies should offer multiple payment methods including credit cards, bank transfers, digital wallets, and ACH payments to accommodate client preferences and speed up payment receipt. In QuickBooks Online, enable payment methods by connecting to payment processors like QuickBooks Payments under Settings > Payments, add payment links directly in invoices for easier payment, and monitor which payment methods are most popular among clients. Benefits include increasing likelihood of on-time payments by removing payment barriers, enhancing client satisfaction through convenience, speeding up receipt of funds to improve cash flow, and reducing administrative time spent processing payments. Multiple options are especially important for construction clients who may prefer different payment methods for large amounts.

What ongoing maintenance and monitoring should construction companies perform for their AR processes?

Construction companies should establish regular AR maintenance routines including weekly review of AR aging reports to identify overdue accounts, monthly analysis of payment patterns and client behavior, quarterly assessment of payment terms and collection procedures, regular updates to automated reminder schedules and content, ongoing monitoring of payment method effectiveness, periodic review of retention policies and procedures, and continuous training for staff on AR best practices. Additionally, companies should track key metrics like Days Sales Outstanding (DSO), collection rates, and cash flow patterns to identify trends and improvement opportunities. Regular maintenance helps prevent issues from escalating, ensures optimal cash flow, and maintains strong client relationships while protecting the company's financial health.

‍What RedHammer Can Do For You

At RedHammer, we specialize in helping construction companies optimize their accounts receivable processes in QuickBooks Online. Our expert services include:

• AR Process Auditing and Setup: We’ll ensure your AR process is tailored for efficiency and accuracy.
• Progress Invoicing Management: We’ll assist with setting up and managing progress invoicing for multi-phase projects.
• Retention and Payment Terms Optimization: Let us help you manage retention amounts and customize payment terms to improve cash flow.
• Automation and Workflow Solutions: We can automate reminders and collections processes, so you spend less time chasing payments and more time growing your business.
• Ongoing Support and Training: Our team provides ongoing support and training to help your staff leverage the full potential of QBO for better financial outcomes.

Partner with RedHammer to streamline your AR processes, maintain steady cash flow, and ensure the long-term success of your construction business.

Conclusion

Effectively managing accounts receivable is critical to maintaining a healthy cash flow, especially in the construction industry, where projects are long-term, and payments can be unpredictable. By implementing best practices such as progress invoicing, correct AR retention management, clear payment terms, multiple payment options, regular AR aging report reviews, and automated reminders, you can optimize your AR processes in QuickBooks Online.

These strategies help ensure timely payments, reduce bad debt risk, and contribute to your construction company's financial stability and growth. By staying proactive in your AR management and leveraging the full capabilities of QBO, you can mitigate common financial challenges, keep projects on budget, and ensure long-term profitability.